Lots of growth investors seem to be cursing wall-street for valuing AMD ~1.0X P/S with 5.8B in revenues and good results lately. If everything were good with AMD, stock should be valued at $13-$18. But I think it could fall to $5 or even lower as I’d describe in the article today. But let me first explain you what’s going behind the numbers.
First of all I’d like to give credit to AMD management for cleaning up their act!! AMD has become an interesting story and lots of people think its undervalued. How can you blame them? If you look at common knowledge measures, it does look under valued.
Several investors have been severely burned by AMD fall from $40 in 2006 to $2 in Feb 2009. In 2009, company was struggling with huge debt hanging off the balance sheet & measly cash left to sustain life. Since then after management changes, AMD has been cleaning its books including Global foundries deconsolidation. Last November company hit a jackpot with huge payoff from Intel lawsuit. Before GF deconsolidation there was 9.3Billion liabilities hanging off the chest of AMD. AMD has cleaned books to reduce liabilities to 4.4B.
Today AMD still has $2.5B debt hanging in books. It doesn’t have sufficient cash/ current assets to pay off all the debt immediately. But management has been able to convince wall-street & Wall-street has handsomely rewarded stock since then ($2-$8.50 = 325% runup!). The remaining debt has hampered the growth opportunities a bit for AMD. Management has been carefully watching costs and profitability. Results show in Q1 AMD grew slower than rest of Computation/ Graphics industry. Both Intel & Nvidia revenues grew much more in Q1 than AMD compared to Q4 last year (so called seasonal slow down). I think AMD must have put the Intel 1.25B jackpot to payoff some of debt.
Here are some comparative numbers I wanted readers to consider:
VALUATION MEASURES | AMD | INTC | Nvidia |
Market Cap (intraday)5: | 5.92B | 117.82B | 7.91B |
Price/Sales (ttm): | 1.01 | 3.11 | 2.42 |
Price/Book (mrq): | 7.34 | 2.77 | 2.99 |
Profitability | |||
Profit Margin (ttm): | 18.16% | 16.15% | -2.04% |
Operating Margin (ttm): | -1.60% | 29.69% | -5.04% |
Management Effectiveness | |||
Revenue (ttm): | 5.80B | 38.28B | 3.33B |
Qtrly Revenue Growth (yoy): | 33.70% | 44.10% | 104.20% |
Gross Profit (ttm): | 2.27B | 19.56B | 1.18B |
% Gross Profit/ revenue | 39.1% | 195.7% | 282.2% |
Total Cash (mrq): | 1.93B | 16.34B | 1.73B |
Total Debt (mrq): | 2.76B | 2.38B | 24.45M |
Current Ratio (mrq): | 2.03 | 2.66 | 3.16 |
Given high P/B ratio, AMD will remain sensitive to market economy gyrations, which could bring stock down to $5 if stock gets attention of Short side Sellers. If P/B is brought to levels of Intel/ Nvidia, stock could be cut in half from here. Which is 45-60% drop. Today stock is valued at 7X Book value which is much higher than industry. Higher valuation shows that street is convinced that management can fix the balance sheets more this year.
Company operations are generating enough money to pay off current debts. But it could take company a long time to pay off debts. Its not growing fast enough to convince the wall-street otherwise. Everybody is in wait & watch mode. Company is not growing as much as competition (Nvidia, Intel), Company is higher debts and gross margins are very poor. Management should look into suing Intel again to raise funds more quickly?? After all they were very successful last time J
All in all I consider AMD as a speculative bet, with lower downside potential and huge upside. Its great company to watch. In next quarters keep an eye on balance sheets in addition to revenue/ margin growths. If company executes well, stock could go $13-$18, but if they flounder, $5 will be in plates. Momentum charting also shows that stock could fall at $5, so I won’t rule out completely for this summer if “sell in may & go away” plays out.
Other day I published charts for $5 targets : http://0c18bf18.linkbucks.com
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